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Government policies and strategies of large firms: their impacts on the evolution of the Hungarian automotive industry since the 1960s
Submitted by Attila Havas, Institute of Economics, Hungarian Academy of Sciences on 20 avr. 2015 - 17:44
Type de publication:Conference Paper
Source:Gerpisa colloquium, Paris (2015)
At least three fundamentally different periods can be distinguished when one is studying the evolution of the Hungarian automotive industry. Government policies – including both horizontal and sectoral ones – and the strategies of large domestic and foreign automotive firms played decisive, but different, roles in these distinct periods. The proposed presentation is aimed at analysing the impacts of government policies and firms’ strategies since the 1960s, that is, in the last two of the three periods.
The first period, spanning form the beginning of the 20th century until the late 1940s, is not analysed in the presentation, but its main features are highlighted here to provide a background. Cars, first assembled from imported kits, have been produced in Hungary since 1903. 1905 saw the first car designed and built by a Hungarian engineer, János Csonka. Bus manufacturing started in 1909. Preparation for World War I sparked production of cars, lorries and engines. Ravages of war and The Great Depression hindered the sector in the 1920s. Recovery started in the 1930s, and Ford models were also produced under a licence agreement. Motorcycle production commenced in the 1930s, too. First imported kits were assembled but local content had increased to ninety per cent by 1935. World War II boosted production again, particularly for military vehicles (Berend and Ránki , ). All the major car parts – engines, gears, chassis – had also been produced in Hungary until the mid-1940s. In other words, Hungary’s vehicle manufacturers have not been mere assembly units of foreign companies, but have accumulated skills in automotive engineering, building upon a long tradition in mechanical engineering.
The decisive features of the second period are nationalisation and the introduction of central planning. Private automotive companies - like in all other sectors, and in all other countries in the Soviet block - were nationalised by the late 1940s. Automotive production facilities were ruined during the war. Manufacturing of motorcycles, buses, lorries and other commercial vehicles resumed after the war. Car production, however, was abandoned under a new industrial policy, which shaped Hungary’s industrial structure to comply with a CMEA-wide division of labour. The new policy first was influenced informally by Soviet advisors working in Hungary and then by a formal Soviet-Hungarian specialisation agreement signed in 1964. The accord co-ordinated the two countries’ industrial development projects, including automotive manufacturing, in the wider context of CMEA. It also stipulated that Hungary would specialise in producing buses for the entire CMEA. Ikarus, Hungary’s bus manufacturing firm became one of the largest in Europe, turning out some 14,000 units a year in the 1980s.
Bus manufacturing provided an excellent opportunity to make use of the considerable skills accumulated in auto parts manufacturing companies, in spite of the lack of car manufacturing since the late 1940s. Hungarian suppliers also shipped car parts to other CMEA countries since the 1960s. Certain automotive components, e.g. engines, axles, undercarriages and tyres for commercial vehicles as well as bulbs, batteries and dash boards for cars, were also exported for hard currencies (to Western Europe, the US and India).
As for R&D, hardly any original project was conducted in this period in a sharp contrast with the previous one. The pace of technological improvement was set by CMEA demand. Needless to stress how different these requirements were compared to those of advanced countries, given the severe shortage of cars and the lack of rigorous safety and environmental regulations. The only counterbalancing factor was that CMEA car manufacturers, expect Skoda, based their product development strategy on Western licences since the 1960s. Hence, their suppliers’ products were also based on Western licences. The most advanced product and process technologies, however, were not made available through these licence agreements. In other words, it was a ‘safe’ way to maintain or even widen the technological gap. In fact, due to the lack of incentives to innovate – that is, no import competition at all, extremely long queues for effectively rationed cars, lack of up-to-date safety and environmental rules – CMEA car producers were happy in the 1980s with their technology as much as thirty years old. Their Hungarian suppliers, therefore, had hardly any opportunity and incentives to innovate, either.
Those suppliers, however, which exported their products for hard currencies had no other choice than to continuously improve their products through up-to-date Western licences (e.g. from Bosch, MAN, KNORR, ZF, Girling, Lucas) and adaptive in-house R&D projects.
Although formally the National Planning Office and the line ministries were in the driving seat, large automotive firms, such as Ikarus, Rába, and Csepel Auto also played a non-negligible role, especially since the 1970s, given their political and economic weight, through the so-called ‘plan bargaining’ process.
Re-emerging car production and transition to market economy marked the beginning of the third period in the early 1990s. Actually, these were originally independent developments. Hungarian government officials had long intended to re-establish car industry for two main reasons. First, the severe shortage of cars was rather annoying in this reformed planned economy – often referred to as ‘goulash communism’ in Western media. This shortage resulted in an ageing, obsolete car fleet. Second, the government also viewed car manufacturing as a means of industrial modernisation, with its exacting technical and organisational requirements. Industrialists also backed the idea as a major step toward integration into the world economy – and as another golden opportunity to obtain big slices of investment funds from the government. Against this backdrop, eventually two foreign investors, namely Suzuki and GM Opel ‘resurrected’ the Hungarian car industry at the turn of the 1980s and 1990s. Opel later abandoned car assembly, and focussed on engine and gearbox production. A third major player, VW Audi took the opposite direction: it started with a massive engine production facility, and then first added the assembly of its low-volume, high-end sport models, namely TT Coupé and Roadster in 1998, followed by A3 models in 2013. The fourth major player is Daimler, commencing the production of B-class cars in 2012, and that of CLA in 2013.
Major European, US, and Japanese T1 suppliers have also entered the Hungarian market either via green-field investments or taking over Hungarian firms. Overall, the share of component manufacturing was in the range of 40.5-51.0% in the turnover of automotive industry in 2000-2014.
The Hungarian passenger car market is fairly small, and has been shrinking recently. Thus, as planned originally, the bulk of the cars assembled in Hungary are exported, even in the case of Suzuki (95.4% in 2013), although it is producing small and inexpensive cars, in sharp contrast to Audi and Mercedes. The production volumes are also modest – Suzuki: 160 thousand units in 2013; Audi: 135 thousand units (2014); Daimler: 150 thousand units (2014) – and hence 86-90% of the revenues of the component suppliers were stemming from exports in 2000-2014. Despite these facts, Hungarian decision-makers tend to focus their attention on car manufacturers.
Given the entry of major foreign car and components manufacturers, whose strategies are largely set by their headquarters (i.e. not by the Hungarian subsidiaries), these MNCs have played a decisive role in shaping the Hungarian automotive industry.
Policy-makers need to consider that various types of foreign direct investment activities have different longer-term impacts on economic development. Globalisation either poses threats to, or offers opportunities for, economic development, depending on the capabilities and investment promotion policies of the host country. To use an elementary dichotomy of foreign direct investment, one type can be called ‘foot-loose’. These companies conduct activities with low level of local knowledge content, and thus pay low wages. They are ready to leave at any time for cheaper locations. The other types of investors, in contrast, are ‘anchored’ into a national system of innovation and production: they perform knowledge-intensive activities, create higher-pay jobs, build close contacts with domestic R&D units and universities and develop a strong local supplier base. In brief, co-ordinated, mindful investment promotion, science, technology and innovation (STI), human resource and regional development policies are required to embed foreign investors. In this way, skills can be upgraded, local suppliers’ innovation capabilities can be improved to boost their competitiveness and intense, mutually beneficial business-academia collaboration can be nurtured. Otherwise most of the investment ‘sweeteners’ are wasted if foreign firms only use a given region or country as a cheap, temporary production site.
These policy implications might be relevant for other countries, too, with a relatively small domestic car market, if they intend to avoid being locked into a low-wage, low-value-added ‘development’ path.